Over the past few decades many businesses have focused on the sole objective of creating shareholder value without always giving much thought to the reasoning behind this premise. It was often stated that managers had a legal duty to consider shareholders’ interests to the exclusion of other stakeholders—customers, employees, suppliers, and the communities which the businesses serve—even though a legal analysis did not and does not support that position.
This theory that managers have a duty to maximize shareholder returns has led to a focus on the short-term since many shareholders make decisions based on quarterly results. Individuals, as well as institutional shareholders, share in this desire for a quick return on investment. Most of us have been guilty of vanishing companies from our portfolio which have not shown quarter-over-quarter growth without understanding the longer-term strategy of the company.
As with many of our theories and assumptions, it takes a period of time to determine the outcome, and in many cases, the resulting unintended consequences. For instance, it takes at least a couple of decades to determine how our parenting styles influenced the values and ethics of our children. Sometimes after the passage of time, we begin to question if what we think and believe is in our best interest and those around us.
It is at this point that Americans finds themselves today. We are beginning to examine if a singular focus on shareholders really does result in healthy, growing companies which provide continuous, strong returns year after year. We are questioning the high price that this often narrower, shorter-term focus has on society and the potential results on our daily lives. Many Americans are taking the position something needs to change.
As evidence of this growing disillusionment, we are witnessing increasing support for Federal legislation such as the Accountable Capitalism Act, a bill that would require corporations with $1 Billion or more of annual revenues to comply with certain Federal mandates which consider the interests of all corporate stakeholders. Also recently, Senator Marco Rubio proposed ending preferential tax treatment for stock buyback programs—one of the ways which has been used by companies to increase shareholder returns. Most concerning, multiple surveys indicate that the millennial generation is souring on capitalism as the foundation of our economy.
Of course, this theory of singular shareholder focus which often results in short-term profits cannot be solely blamed for these positions. As a society we are also dealing with globalization, disruptive technologies, higher costs of education, and other societal changes. The point here is that the external environment has shifted, and sole shareholder focus is not well positioned given the current intersection of society and business. Companies seeking a successful future are wondering if expanded stakeholder interests might drive increases in shareholder returns. Loyal customers resulting from better, more valuable products; passionate, well-trained customer-focused employees; suppliers interested in joint successes; and supportive politically-friendly communities seem to provide a welcomed platform for corporate prosperity.
This change may be difficult, however, given the cultures and solidarity of thought which have been built around “shareholder supremacy.” Stated in the simplest terms, the following need to occur:
- CEO’s understanding of the value of managing beyond short-term profit maximization and championing longer-term thinking within their organizations;
- Boards of directors supporting longer-term strategies and holding management accountable for implementation and progress toward the goals;
- Shareholders engaging in discussions with companies about long-term value creation; and
- Companies providing consistent and frequent information regarding progress on these strategies.
We can and should be optimistic that the situation in which we find ourselves as a society can and will be improved. We are seeing respected and admired companies willing to take the risk of a better future through a longer-term focus. For example, Apple has ended its practice of reporting quarterly sales on its individual products and is concentrating its efforts on longer-term investments. Larry Fink, CEO of Blackstone Group LP, is challenging portfolio companies to develop strategies for long-term growth. Private equity firms, known for their short-term focus, are finding opportunities with longer-term funds. The Carlyle Group LP, and others, now have funds which are positioned to hold the companies in which they invest for a much longer period.
The time has come for a new way of thinking about and valuing the contributions of all stakeholders to build successful businesses for the decades to come. Balancing of stakeholder interests, however, can be difficult and messy. Although good managers can likely rise to the challenge, this approach implies that tradeoffs are required—increased interest in one set of stakeholders requires decreased attention to another. Strategists understand that the best results come from strategies that create new markets for goods and services–instead of fighting with competitors over market share. This same theory can be applied to the creation of shareholder wealth.
Profits are the outcome of organizational efforts. When value is created for all stakeholders including customers, employees, suppliers, and communities, we will likely find this increased value results in increased profits for shareholders. A leader of this approach, Starbucks with its quality products for customers, education and training for employees, partnerships with suppliers and contributions to community, is showing promising results– recently reporting record quarterly revenues and profits. Long-term sustainable shareholder value in the future will come from this different way of thinking.
About the Author
Jeanie Sell Latz, J.D. is a member of the Bloch Executive MBA faculty at the University of Missouri – Kansas City. Dr. Latz completed her J.D. at the University of Missouri – Columbia and has served as executive vice president, chief legal officer and corporate secretary of Great Plains Energy, a Fortune 1000 publicly traded holding company. She currently consults in the area of corporate governance and holds the distinction of Governance Fellow, granted by the National Association of Corporate Directors.